adoption of efficient consumer response: the issue of ... · cross-docking, as part of the...

Adoption of efficientconsumer response theissue of mutuality

Sherah Kurnia andRobert B Johnston

Introduction

Efficient consumer response (ECR) has beenperceived by a number of companies in manyregions as a key catalyst for supply chainreform (Szymankiewicz 1997) In its attemptto re-engineer grocery industry supply chainsECR promotes efficiency initiatives in fourareas promotion product developmentproduct replenishment and store assortmentThese four initiatives are facilitated by anumber of programs and enablingtechnologies especially electronic commerce(EC) technologies which eventually integrateall players within a supply chain The ultimateobjective of ECR is thus to reform a supplychain in such a way that products can bebrought smoothly and continuously frommanufacturer to consumer as a result oftimely accurate and paperless informationflowing from consumer back to manufacturerSince ECR is a typical EC-enabled inter-organisational system partnerships amongparticipants of a supply chain play a crucialrole in achieving the objective of ECR (KurtSalmon Associates 1993 Martin 1994)

According to the ECR vision (Kurt SalmonAssociates 1993) supply chains within thegrocery industry must undergo a totaltransformation Participants within a supplychain need to work together to maximise theefficiency of the whole supply chain in orderto achieve one common goal that is to deliverbetter value to the consumer (Kurt SalmonAssociates 1993 Karonis 1997Szymankiewicz 1997) With collaboration andintegration among the players of a supply chainthrough the use of information technologiesthe boundaries between these players willgradually disappear (Preiss et al 1996)Manufacturer distributor and retailer withinone supply chain can thus be considered as asingle entity which can be thought of as avirtual organisation pursuing one commongoal (Preiss et al 1996 Marshall et al 1999)As a result competition will shift fromcompany against company to supply chainagainst supply chain (Daugherty et al 1996Montezemolo 1997)

A number of studies have been conductedin the USA Europe and Australia to examinethe potential benefits obtainable from ECR(Kurt Salmon Associates 1993 Krum 1994Coopers and Lybrand 1995 Leggett 1996Mathews 1996 Ross 1996) Despite themany benefits of ECR adoption of ECR has

The authors

Sherah Kurnia is a Lecturer and Robert B Johnston is

a Senior Lecturer both at the University of Melbourne

Melbourne Australia

Keywords

Consumer behaviour Response rate Grocery

Case studies Australia

Abstract

The adoption of efficient consumer response (ECR) has

been slow in many regions despite its many potential

benefits to supply chain participants through reduction of

inventory level and operating costs There has not been

any well-developed theory that can explain this slow

uptake Argues that the inherent characteristics of ECR

have actually created barriers to its own adoption As an

inter-organisational system (IOS) ECR adoption requires

co-operation and trust between trading partners which

are unlikely to happen unless costs benefits and risks of

ECR implementation can be mutually shared Shows

using a case study conducted within one supply chain

that an unequal distribution of costs benefits and risks

among manufacturer distributor and retailer is inherent in

the implementation of cross-docking which typifies the

overall ECR program The findings of this study lead to a

new direction in understanding the barriers to adoption of

ECR and IOS in general

Electronic access

The research register for this journal is available at

httpwwwmcbupcomresearch_registers

The current issue and full text archive of this journal is

available at

httpwwwemerald-librarycomft

Research paper

230

Supply Chain Management An International Journal

Volume 6 Number 5 2001 pp 230plusmn241

MCB University Press ISSN 1359-8546

been slow in many regions (Kurt SalmonAssociates 1995 19956 1997 Coopers andLybrand 1998) Explaining the slow uptakeof this inter-organisational reform withconsiderable benefits is an importanttheoretical problem that has not beenadequately addressed in the ECR literatureIn a previously published paper (Kurnia andJohnston 1999) we have argued that the slowuptake of ECR can be attributable to the lackof cases of successful ECR implementation byorganisations We then identified a number oflikely determinants of success with ECRusing survey as a research method Thefindings while providing an explanation ofthe slow ECR adoption rate were limited bythe necessary focus on individualorganisations as the unit of analysis Studiesfocusing on the entire supply chain aretherefore required to gain more in-depthunderstanding of the complex interactionsbetween companies which affect adoptionand implementation of inter-organisationalsystems such as ECR Such studies are stillcurrently limited and there has been agrowing interest in researching this particulararea (Chan and Swatman 1999 Gregor andJones 1999 Gregor and Menzies 1999Johnston and Gregor 2000)

In this study the virtual organisationliterature (Grenier and Metes 1995 Preiss etal 1996 Allen et al 1999 Marshall et al1999 Marshall and McKay 1999) wasreviewed to provide a more detailedunderstanding of the complex issues involvedin ECR adoption Specifically the model ofcritical success factors for virtual organisationproposed by Marshall and McKay (1999)appears to be relevant to addressing the slowadoption of ECR They argue that due to theinterdependent nature of the activities ofvirtual organisations all members in such anorganisation need to have a common purposeshare risk trust each other and have mutualbenefits (Marshall and McKay 1999) Anumber of other authors agree that withoutthese four factors the virtual organisationcannot be successfully achieved (Grenier andMetes 1995 Hart and Saunders 1997Karonis 1997 Allen et al 1999 Marshall etal 1999) and we argue this applies equally toEC-enabled inter-organisational initiativessuch as ECR (Karonis 1997) In addition tothese four factors we believe lsquolsquocost sharingrsquorsquoshould be considered alongside lsquolsquobenefitsharingrsquorsquo

Specifically in this paper we examine theissue of mutuality of benefits costs and risksbetween retailers distributors andmanufacturers in ECR adoption using a casestudy conducted within one supply chainThe case study looks at one element of ECRwhich typifies the whole approach namelycross-docking as part of the ContinuousReplenishment Program Cross-docking is agood example to address the inter-organisational aspect of ECR as it promisessubstantial cost savings requires relativelysimple technology to adopt but requires goodcommunication cooperation and trustbetween trading partners We use this casestudy to show that certain aspects of theapproach itself while capable of producingsubstantial supply chain wide efficienciesinherently give rise to an imbalance in thedistribution of benefits cost and risksamongst the participating parties which isparticularly unfavourable for manufacturersThis indicates that cross-docking andEC-enabled inter-organisational reforms ingeneral imply the need for participatingparties to re-negotiate trading terms ifmutuality is to be achieved We then describethe efforts taken by the manufacturer in thecase study to better position itself in suchnegotiations using a detailed activity-basedcosting (ABC) study of their processes

The analysis of this case study shows thatthe ideal state envisioned by ECR cannot bereached through individual self-interestedactivity of the participants Given theadditional plausible assumptions that partieswill be unwilling to adopt reforms without asatisfactory division of benefits costs andrisks and that such a re-distribution involvingsupply chain wide negotiation cooperationand trust will be difficult to achieve amongstseparate corporate entities we argue thatECR reforms by their very nature presentbarriers to their own adoption By consideringthe entire supply chain as opposed toindividual organisations as a unit of analysisthis study leads to a new direction inunderstanding ECR adoption

Research methodology

The case study was conducted with oneleading manufacturer and one leading retailerin Australia The manufacturer in the casestudy operates in approximately 80 countries

231

Adoption of efficient consumer response the issue of mutuality

Sherah Kurnia and Robert B Johnston


Volume 6 Number 5 2001 230plusmn241

employing around 300000 people with aturnover of $58 billion per year Theparticipant retailer is one of the big threesupermarket chains in Australia It has 410stores (supermarkets) throughout Australiaand has been in business for 84 years Thiscompany employs more than 52000 workersand serves over 45 million customers perweek with an annual turnover of over $19billion The case study conducted with theparticipant retailer also allowed us to embracethe distribution function since the participantcompany manages its own distribution toindividual retail stores (supermarkets)

The unit of analysis in this study is theentire supply chain which includesmanufacturer distributor and retailer Thecase study is thus not intended to becomparative but rather to build a richerunderstanding of a single supply chain As notmany theories exist on the adoption of ECRover the entire supply chains theory buildingsingle case studies are an appropriate researchmethod (Eisenhardt 1989 Yin 1989)

The data collection techniques employedwere site inspection and semi-structuredinterviews with a number of managers andindividuals involved in ECR-related projectsof the participating companies Twodistribution centres of the participatingretailer were deliberately chosen andinspected in this in-depth case study in orderto examine the differences between thetraditional lsquolsquopick-and-packrsquorsquo approach tohandling goods and the lsquolsquocross-dockingrsquorsquoapproach advocated as part of ECR

With the retailerdistributor four managerswere interviewed They were the LogisticsPlanning manager the National SupplyChain manager a Regional DistributionCentre manager and the NationalDistribution Centre manager With themanufacturer interviews were conductedwith the Supply Chain Developmentmanager ECR manager and a Project Analystwho is involved in the ABC of the companyEach interview with each contact person tookapproximately between 60 and 90 minutes toassess the impact of cross-docking adoptionon the entire supply chain and how themutuality issue can be resolved

Factual data obtained from the site visitsand interviews were tape recorded Assuggested by Miles and Huberman (1994)after each interview the recorded informationwas directly transcribed as a written-up field

note in an electronic format All these rawdata obtained from the case study were thenreviewed and arranged systematically Someexcerpts were also selected Information thathas not been obtained and any ambiguitywere identified Follow-ups were then madethrough the phone and electronic mail forclarifications and for obtaining moreinformation from the participants whennecessary For some confidential informationface-to-face interviews were re-organised withthe participants From all the data collectedfrom the case study participants similaritiesand differences in terms of requirements forcross-docking implementation as well asbenefits costs and risks involved inimplementing cross-docking for theparticipant manufacturer distributor andretailer were identified In addition thedistribution of costs benefits and risks ofcross-docking implementation among thecase study participants was analysed Thefinal lsquolsquowrite-uprsquorsquo of the case study was thendistributed to the participants to ensure allinformation was correct and no confidentialdata were disclosed From the data collectedthe benefits costs and risks involved inimplementing cross-docking were identifiedand the distribution of each among theplayers of this supply chain was analysed

The case study

All alternative product replenishmentapproaches proposed by ECR (lsquolsquocross-dockingrsquorsquo lsquolsquoflow-throughrsquorsquo and lsquolsquodirect-storedeliveryrsquorsquo) are prevalent at the participantretailer although at present only for limitedproduct ranges With cross-docking suppliersdeliver individual storesrsquo orders to adistribution centre Goods are then sortedinto their destinations at the distributioncentre and dispatched Thus the inventorylevel at the distribution centre is almost zeroat any time With flow-through goods(specific to storesrsquo orders) delivered bysuppliers are brought to the dispatching areaof a distribution centre to be loaded to adistributorrsquos truck ready to be delivered tostores There is no sortation required at thedistribution centre Direct-store delivery(DSD) employs direct delivery from suppliersto stores by-passing distribution centre ordistributor At the moment approximately 90per cent of the products at the stores of the

232





company under study come from its owndistribution centre while 10 per cent(perishables) are supplied directly bysuppliers (DSD) Out of this 90 per cent onlyslow moving items are handled by cross-docking while very high demand items arehandled by flow-through operation

The retailerrsquos distribution centres haverecently been integrated into a new businessentity At the moment a service fee is chargedto the regional supermarket head office notindividual stores Thus the lower theoperating costs at the distribution centres theless the supermarket has to pay for thelogistics costs to get products on the storesrsquoshelves The company will soon commence anew lsquolsquouser paysrsquorsquo arrangement whereby eachdistribution centre will charge each customer(store) for the costs of replenishing the storeresulting in high cost transparency betweendistribution centres and stores In the nextsections two distribution approaches (pick-and-pack and cross-docking) are discussedand analysed comprehensively

Pick-and-pack operationThe distribution centre with the traditionalpick-and-pack operation handles medium tofast moving items It has been operating forten years This distribution centre handles775000 cartons per week on average within350000 square feet A warehousemanagement system and a computer aidedordering system known as reorder inventorysystem (RIS) with some basic forecastingfunctionality are used to manage theinventory and ordering These two systemsinterface with each other On average thehandling cost per carton at this distributioncentre is broken up as 24 per cent directlabour costs and 76 per cent overhead costsincluding consumable costs such asstationary wrapping and so on and fixedoverhead costs of insurance electricitybuilding administration and infrastructuresuch as main frame computers

Figure 1 summarises the process of pick-and-pack operation at this distribution centreThe following sub-sections discuss the mainbusiness activities involved in the pick-and-pack operation

OrderingStores place orders with this distributioncentre everyday via file transfer over a privatededicated network These are independent of

the replenishment orders placed by thedistribution centre with the suppliersSupplier orders are larger and less frequentand are triggered by an order pointorderquantity system Each product has a pre-determined order quantity order point andsafety stock level The computerised RISidentifies items that have reached the re-orderpoint (arrow a in Figure 1) and generates arecommended order quantity for each item(arrow b) In the ordering area reportsgenerated by the RIS are printed on a dailybasis After reviewing and making necessaryadjustments to the recommended orderspurchase orders are sent to suppliers via EDIfax or telephone depending on the supplierrsquoscapability

ReceivingWhen goods arrive from a supplier they areaccompanied by a paper-based deliverydocket Suppliers need to unload the pallets atthe receiving bay and a time allocated by thedistribution centre Upon arrival informationabout the delivery is entered into thewarehouse management system (arrow c)The inventory database is then updatedaccordingly (arrow d) The warehousemanagement system issues a lsquolsquoput awayrsquorsquoinstruction slip and a bar-coded pallet label(arrow e) for each pallet Each pallet is thentaken by a forklift to its location (arrow 1) Allforklifts are equipped with a radio frequencyterminal that communicates with thewarehouse management system After storingthe pallet on the required shelf the bar-codeon the shelf is scanned to allow the warehousemanagement system to keep track of theinventory location (arrow f)

DispatchingIn the dispatching area due store orderdetails are obtained from the warehousemanagement system (arrow g) After gettingthe details about the inventory required(arrow h) labels are generated by thewarehouse system for each due store orderdetailing the time required to complete theassignment (arrow i) The inventory level isthen updated accordingly (arrow j) Theinstruction on which pallets are moved downfrom the inventory shelves to the reservepicking slot is made available (arrow k) Therequired pallets are moved to the reserve slotby a forklift (arrow 2) Goods are picked frompallets at the reserve slot as required (arrow 3)then the pallets are moved back to the

233





inventory shelves (arrow 4) All items for anindividual store are consolidated into onepallet ready for dispatching (arrow 5)

Cross-docking operationThe second distribution centre studied usesthe cross-docking approach At the momentcross-docking is only used for slow movingitems (indent items) such as importedgeneral merchandise It has been operatingfor six years with a throughput volume of120000-140000 cartons per week within10000 square feet Thus this operationhandles 16 the throughput of the pick-and-pack operation using only 135 the floor areaThe average handling cost is broken up as 71per cent direct labour cost and 29 per cent

overhead cost The total of cross-docking costis 21 per cent less than the pick-and-packcosts as shown in Figure 2 Thus for cross-docking the majority of cost is salaryintensive with small overhead costs

Figure 3 summarises the cross-dockingoperation Each process is described in detailin the next sub-sections

OrderingOrders from each individual store arecollected via the private internal network andcentrally collated into a single EDI order foreach manufacturer with individual storerequirement specifications Each order is sentto the suppliers who deliver the consolidatedgoods to the distribution centre on the duedate Stores place their orders every four days

Figure 1 Summary of pick-and-pack operation

$

amp rsquo

(

)

)

rsquo +

amp

234





according to a roster The lead-time forproducts replenished using the cross-dockingoperation is four days This lead-time is to bereduced to two days through a betterinformational coordination between theretailer and its suppliers

ReceivingIn the cross-docking operation all deliveriescome through one receiving area fromapproximately 330 suppliers of which 30 areseasonal and 300 daily Each pallet deliveredhas 80 to 90 store orders which are packed incartons One carton is for one store and it maycontain multiple items Delivery dockets(arrow a in Figure 3) are checked against acomputer printed store purchase orderavailable from the companyrsquos internalnetwork (arrow b) At the moment 25 percent of suppliers have the ability to producebar-coded labels for the carton indicating thedestination store Upon receiving cartonsfrom non-bar-code compliant suppliersproprietary bar-code labels are created at thisdistribution centre to indicate the storelocation (arrow c) Random manual checksare still performed on 10 per cent of aparticular supplierrsquos deliveries to ensure thatthe supplier meets the actual orders (arrow 1)

Figure 3 Summary of cross-docking operation

Figure 2 Handling cost per carton for pick-and-pack

and cross-docking

235





Bar-coding for non-compliant suppliers andinspection of goods is the most labourintensive part of the operation

Sorting and dispatchingAfter each carton has been bar-coded toindicate the store number and randomlychecked it is sorted according to itsdestinations using a re-configurableautomatic sorting line Each carton is loadedonto a conveyor belt (arrow 2) along which ascanner reads the bar-code on the carton anddiverts it to the assigned side bay (arrow 3)The assignment of side-bays to stores isdetermined from the store delivery rosterdisplayed on a computer (arrow d) Only alimited number of stores can be handled perday using the current sortation function at thedistribution centre and therefore the storesmust be put on a four-day roster thus limitingthe applicability of cross-docking for slow-moving merchandise lines At the end of theline all cartons with the same destination areconsolidated into one pallet shrink-wrappedfor security during the trip and loaded into acontainer (arrow 4) One container isallocated for each state

Case analysis and discussion

Pick-and-pack operationThe above description of the pick-and-packapproach indicates that since suppliersimpose a minimum acceptable re-orderquantity for the items they supply thisoperation deals with infrequent largedeliveries from suppliers In addition theexistence of buffer stock with an averageholding stock of 12 days leads to a need foran IT infrastructure and sophisticatedwarehouse management systems to managethe entire operation

The consequences of having such anoperation differ for manufacturersdistributors and retailers For manufacturersthe pick-and-pack approach involves lowelectronic commerce infrastructurerequirements for information sharing sincethere is no critical timing between theincoming and outgoing goods Buffer stocksat the distribution centre are used as asubstitute for informational coordination ofmanufacturer and retailer activity Inaddition this operation allows manufacturersto have high production efficiency throughshipping large orders The drawback for

manufacturers is that there is no visibility ofindividual store demand patterns becauseamalgamated orders are placed bydistribution centres or distributors withoutspecifying individual store requirements As aresult manufacturers have no access to theinformation required for advertising andtarget marketing

For distributors this operation involveshigh costs it is labour intensive andinefficient There is multiple double handlingof goods from receiving and storing todispatching as shown in Figure 1 It alsorequires high investment in sophisticated ITinfrastructure due to the need to manage thelarge buffer stock within the constraint offinite capacity Problems with space may arisedue to inaccurate forecasting for seasonalitywhich may lead to high inventory levelsthreatening to overload the capacity of thewarehouse

For retailers this operation is highlyreliable Since the replenishment of goods canalmost be guaranteed by the existence of abuffer stock at the distribution centre theproblem of being out of stock on the shelvescan be avoided The inefficiency of thisoperation at the distribution centre ordistributor side however causes retailers topay a high cost for product replenishment Inaddition having buffer stock at thedistribution centre reduces the shelf life ofperishable products

Cross-docking operationTable I summarises the differences betweenpick-and-pack and cross-docking operationsidentified from the case study Unlike pick-and-pack the cross-docking operation ischaracterised by small frequent deliveriesfrom suppliers and to individual stores Withthis approach manufacturers have thevisibility of the individual store requirementsThe need for buffer stock at the distributioncentre is eliminated by the high degree ofinformational coordination betweenmanufacturer deliveries and retailerrequirements The fundamental emphasis ofthis operation is on the sortation of storeorders at the distribution centre whichrequires only modest levels of technologyinvestment and thus eliminates the need forsophisticated IT infrastructure It is moredependent on EC compliance of tradingpartners as well as partnership and trust The

236





efficiency of this operation is high since thereis no double handling of goods

The consequences of cross-docking for thevarious supply chain parties are as followsCross-docking allows manufacturers to havehigh visibility of individual store demandssince they get the individual storerequirement specifications from retailersThis allows them to have more stableproduction planning lower inventory levelreduced damage and to perform moreefficient promotion in each retail storeDealing with individual store ordershowever may cause extra costs formanufacturers due reducing the quantity ofbatch production In addition implementingcross-docking requires manufacturers to haveelectronic commerce infrastructure to enableinformation sharing with distributor andretailer allowing accurate replenishment tobe done in a timely manner Manufacturersneed to be capable of receiving purchaseorders in EDI format and producing advanceshipping notices (ASN) based on purchaseorders received to ensure data integrity Dataintegrity is very important in cross-dockingdue to the fast pace of the operation Anymistake in supplier deliveries may result inout-of-stock situation at the store levelMoreover manufacturers need to be able toproduce a bar coded serial shipping containercode (SSCC) to identify shipments which isessential for an optimal use of ASNFurthermore manufacturers need to possessmore complex order processing infrastructureto deal efficiently with small individual storeorders Finally manufacturers need to forgothe traditional economies of scale which maylead to higher labour and transportation costsdue to smaller and more frequent deliveriesand introduce the need for more specialising

packing which is directly usable by retailers(stores) Thus manufacturers appear to gainlittle benefits from cross-dockingimplementation while require highimplementation costs with a medium risklevel

For distributors the cross-dockingoperation is very efficient since it does notrequire a large distribution centre areacomplex computer systems and reduces non-value added handling activities Thus itinvolves low overhead costs in handlingcartons low IT infrastructure requirementsand reduced risk of overloading warehousecapacity The current cross-docking total costper carton is 21 per cent less than the pick-and-pack cost According to the NationalDistribution Centre manager of theparticipant retailer this cost could be furtherincreased to a 49 per cent differential ifsuppliers were fully bar-code compliant If theaverage volume of 775000 cartons per weekhandled by pick-and-pack operation were tobe handled by cross-docking operation therewould be significant cost savings that can beobtained

Other cost savings can be attained fromreduced damaged products as a result ofreduced double handling and reduced expiredproducts since warehousing is eliminated Inaddition with 100 per cent compliance toASN using SSCCs and scan-packing bysuppliers random checking would besimplified and thus costs could be furtherreduced Random checking could bepractically eliminated with increased trustbetween the distribution centre and supplierCross-docking therefore offers manybenefits to distributors and requires minimalimplementation costs and negligible risks

Table I Summary of the differences between pick-and-pack and cross-docking

Pick-and-pack Cross-docking

Suppliersrsquo delivery size Large Small

Buffer stock level High Nil

Systems requirement at distribution centre Sophisticated Simple

Role of distribution centre As a warehouse As a sorting centre

Efficiency of operation Low High

Efficiency per square feet Low High

Overhead costs High Low

Store demand transparency for suppliers Low High

Suppliersrsquo reliability requirement Medium High

Suppliersrsquo electronic commerce requirement Low High

Trust and partnership requirement Low High

237





For retailers since products are not storedin the warehouse stocks have a longer shelflife and better quality They experience lowerlogistics costs as a result of higher efficiencyoperation at the distribution centre which inturn allows them to offer lower prices toconsumers Lower logistics costs howevercan be obtained only if cost savings obtainedby the distributor or distribution centre arepassed on to the retailer (individual stores)through reduced service charges for deliveringproducts to the stores

Satisfactory distribution of cost savings mayrequire complex negotiations between tradingpartners In the present case this kind ofredistribution is relatively easy to negotiatebecause the distributor and retailer havecorporate links A more effective cross-docking implementation may require retailersto have a new IT infrastructure to automatethe replenishment process through theimplementation of computer-aided orderingand EDI for sending purchase orders Therisk of cross-docking for retailers is that ifmanufacturers fail to deliver on time stock-outs may occur Thus for retailers cross-docking appear to offer medium benefitsrequires medium costs but involves highrisks The distribution of benefit cost and riskof implementing cross-docking formanufacturer distributor and retailer relativeto each other as discussed above issummarised in Table II It should be notedthat we were not in a position to quantify theadditional costs and benefits incurred at themanufacturerrsquos and the retailerrsquos side

Towards achieving mutual distributionof benefits costs and risksThe above analysis demonstrates that cross-docking implementation inherently gives riseto an imbalance in distribution of costsbenefits and risks among the participants of asupply chain Manufacturers in particularappear to receive the least benefits and incurthe greatest costs in implementing cross-docking within a supply chain As arguedearlier cross-docking requires cooperationand trust between trading partners and these

are unlikely to happen unless costs and risksare shared and benefits are mutual Thusunless every party experiences mutual benefitcost and risk it is less likely that cross-dockingwill replace the traditional pick-and-packoperation The savings obtained bydistributor and retailer cannot be passed on tothe consumer if high costs are incurred at themanufacturerrsquos side This inherent problem ofmutuality is likely to arise in implementingother elements of ECR and inter-oganisational systems in general

As part of the effort to ensure equaldistribution of benefits costs and risks ofimplementing ECR the participantmanufacturer is conducting an ABC study toexamine the potential changes to the coststructure of the company which would resultfrom the implementation of elements of ECRThe company is seeking high costtransparency allowing them to be wellprepared in re-negotiation of trading termswith the customers (retailers) as moreretailers are shifting towards continuousreplenishment with different methods ofdistribution operations as introduced byECR With greater understanding of the coststructure the company will be able to makebetter decisions in negotiating trading termswith retailers to ensure that costs benefitsand risks will be mutually shared

This is further revealed in the followinginterview excerpt

There has been a power shift between retailersand manufacturers in the last decade Retailersare now in a better position compared tomanufacturers With the position they have theyknow they are winning and therefore are notparticularly interested in conducting ABC study(Business Analyst)

Given that there has been this power shift andthat manufacturers appear to be the potentiallosers in ECR program as demonstrated inthis case study it will be difficult formanufacturers to re-negotiate trading termswith retailers to ensure mutual sharing ofcosts benefits and risks Manufacturerstherefore need concrete evidence to supportthem in trading term re-negotiation Oneapproach in obtaining the evidence is byunderstanding the actual impact of ECRprogram on the current cost structure throughABC studies Therefore the manufacturingcompany involved in this case study is activelyengaged in an ABC study as a key driver oftheir ECR projects

Table II The distribution of benefits costs and risks

Manufacturers Distributors Retailers

Benefits Low High Medium

Costs High Low Medium

Risks Medium Low High

238





From this case study we can see thatcomplex business modeling and negotiationsare required to ensure equal distribution ofcosts benefits and risks of ECR The ABCproject as an action taken by themanufacturer in this case study to enableeffective re-negotiation of trading termshowever can only provide a partial solution tothe mutuality problem since this companyhas access to data for part of the total supplychain only This type of study of the coststructure needs to be extended beyondindividual companyrsquos boundary to provide aglobal solution to the problem of mutualityThis means that other parties within thesupply chain (distributor and retailer) need tocooperate in conducting ABC studies andwork together to ensure equal distribution ofcosts benefits and risks of ECR Otherindependent external bodies within theindustry such as trade associations andstandard bodies may also be required to assistcompanies in achieving the mutuality

Conclusions and future research

The case study demonstrates how efficienciescan be improved and cost savings can begained from the implementation of cross-docking as one of the initiatives proposed bythe ECR Ideally all participants of thesupply chain will gain benefits from cross-docking Manufacturerssuppliers forinstance will get more transparent individualstore demands and hence they will havemore stable and flexible production lessinventory level and better planning forpromotion and production For distributorsit will

lower the operation costs ofreplenishmentreduce warehouse space requirementsreduce the inventory levelleading to reduced handling and damageandincrease the efficiency of distributioncentre per square feet

With reduced operating costs at thedistributor side stores will enjoy lower costsand hence are able to minimise the priceinflation of grocery products charged to theconsumer leading to higher sales betterquality (less damage) products and longershelf life

However the study further reveals that thebenefits costs and risks involved inimplementing cross-docking are not equallydistributed among the players which leads tocomplex negotiations between tradingpartners in adopting ECR Whilemanufacturers experience some benefits fromcross-docking higher costs and risks will beincurred as they need to deal with individualstore orders rather than large consolidatedorders from retailersrsquo distribution centresThese increased costs are inherent to thecross-docking approach which requires theuse of smaller orders and electroniccommunication among participants toachieve its efficiencies These additional costsand risks need to be shared among theparticipants of the supply chain so that themutuality of benefits obtained from cross-docking can be realised by all partiesHowever since there has been a power shiftbetween manufacturers and retailersmanufacturers need to look for concreteevidence to re-negotiate better trading termswith their customers to ensure mutualsharing of benefits costs and risks of gettinginvolved in ECR Therefore manufacturersare more proactive in conducting ABCstudies Global solutions however requiresthe scope of the ABC studies to be extendedto the entire supply chain which requires theinvolvement of distributors and retailers toconduct similar studies or assistance fromexternal bodies in re-distributing costsbenefits and risks of ECR

This study suggests a proposition whichrequires further theoretical analysis andempirical testing that the very approach ofEC enabled inter-organisational systemssuch as cross-docking and other componentsof ECR creates a barrier to theirimplementation By emphasising the use ofelectronic communication between partiesand the use of smaller more frequentreplenishment quantities in order to increaseefficiency and control uncertainty through thecoordination of activities across organisationalboundaries these systems necessitate are-negotiation of product costpricearrangements between parties if thedistribution benefits costs and risks is to beacceptable to all parties This means that thesupply chain wide coordinated activityenvisioned in these inter-organisationalsystems cannot be reached simply byindividual self-interested activity on the part

239





of participants but rather requires them toengage in a form of explicitly negotiatedactivity involving trust and cooperation whichis not particularly easy to firms coming from alaissez-faire free-market competitiveenvironment The difficulty in adopting thisnew modus operandi even where a commongoal is agreed among parties can be a majorbarrier to the adoption of ECR

By studying specific elements of ECRwithin one supply chain the results of thisstudy provide a more in-depth understandingof how ECR can improve the businessprocedures of the Australian grocery industryand the complexity involved in its adoptionThis study thus enriches previous studies inassessing ECR benefits which mostly focusedon individual organisations as the unit ofanalysis (Krum 1994 Mathews 1996 Ross1996 Reese 1997) and in particular explainsthe observations of our previous survey study(Kurnia and Johnston 2001) that Australianretailers are more advanced thanmanufacturers in adoption of supply chainreforms while manufacturers have been moreproactive in conducting ABC studies Thisstudy also suggests that more empirical andtheoretical attention should be given to thequestion of how an industry as a whole canachieve mutuality of benefits costs and risksamong the participants in ECR Thus afurther study to assess the mutuality issue atthe industry-wide level would be required tocomplement this study that only focused on asingle triadic relationship (Kurnia andJohnston 2000) Such a study would be alsouseful in examining the influence of tradeassociations and standard bodies that couldhelp manufacturers distributors and retailerswithin the industry share costs benefits andrisks and assist them in negotiations

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241





been slow in many regions (Kurt SalmonAssociates 1995 19956 1997 Coopers andLybrand 1998) Explaining the slow uptakeof this inter-organisational reform withconsiderable benefits is an importanttheoretical problem that has not beenadequately addressed in the ECR literatureIn a previously published paper (Kurnia andJohnston 1999) we have argued that the slowuptake of ECR can be attributable to the lackof cases of successful ECR implementation byorganisations We then identified a number oflikely determinants of success with ECRusing survey as a research method Thefindings while providing an explanation ofthe slow ECR adoption rate were limited bythe necessary focus on individualorganisations as the unit of analysis Studiesfocusing on the entire supply chain aretherefore required to gain more in-depthunderstanding of the complex interactionsbetween companies which affect adoptionand implementation of inter-organisationalsystems such as ECR Such studies are stillcurrently limited and there has been agrowing interest in researching this particulararea (Chan and Swatman 1999 Gregor andJones 1999 Gregor and Menzies 1999Johnston and Gregor 2000)

In this study the virtual organisationliterature (Grenier and Metes 1995 Preiss etal 1996 Allen et al 1999 Marshall et al1999 Marshall and McKay 1999) wasreviewed to provide a more detailedunderstanding of the complex issues involvedin ECR adoption Specifically the model ofcritical success factors for virtual organisationproposed by Marshall and McKay (1999)appears to be relevant to addressing the slowadoption of ECR They argue that due to theinterdependent nature of the activities ofvirtual organisations all members in such anorganisation need to have a common purposeshare risk trust each other and have mutualbenefits (Marshall and McKay 1999) Anumber of other authors agree that withoutthese four factors the virtual organisationcannot be successfully achieved (Grenier andMetes 1995 Hart and Saunders 1997Karonis 1997 Allen et al 1999 Marshall etal 1999) and we argue this applies equally toEC-enabled inter-organisational initiativessuch as ECR (Karonis 1997) In addition tothese four factors we believe lsquolsquocost sharingrsquorsquoshould be considered alongside lsquolsquobenefitsharingrsquorsquo

Specifically in this paper we examine theissue of mutuality of benefits costs and risksbetween retailers distributors andmanufacturers in ECR adoption using a casestudy conducted within one supply chainThe case study looks at one element of ECRwhich typifies the whole approach namelycross-docking as part of the ContinuousReplenishment Program Cross-docking is agood example to address the inter-organisational aspect of ECR as it promisessubstantial cost savings requires relativelysimple technology to adopt but requires goodcommunication cooperation and trustbetween trading partners We use this casestudy to show that certain aspects of theapproach itself while capable of producingsubstantial supply chain wide efficienciesinherently give rise to an imbalance in thedistribution of benefits cost and risksamongst the participating parties which isparticularly unfavourable for manufacturersThis indicates that cross-docking andEC-enabled inter-organisational reforms ingeneral imply the need for participatingparties to re-negotiate trading terms ifmutuality is to be achieved We then describethe efforts taken by the manufacturer in thecase study to better position itself in suchnegotiations using a detailed activity-basedcosting (ABC) study of their processes

The analysis of this case study shows thatthe ideal state envisioned by ECR cannot bereached through individual self-interestedactivity of the participants Given theadditional plausible assumptions that partieswill be unwilling to adopt reforms without asatisfactory division of benefits costs andrisks and that such a re-distribution involvingsupply chain wide negotiation cooperationand trust will be difficult to achieve amongstseparate corporate entities we argue thatECR reforms by their very nature presentbarriers to their own adoption By consideringthe entire supply chain as opposed toindividual organisations as a unit of analysisthis study leads to a new direction inunderstanding ECR adoption

Research methodology

The case study was conducted with oneleading manufacturer and one leading retailerin Australia The manufacturer in the casestudy operates in approximately 80 countries

231











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Hills CA

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adoption of efficient consumer response: the issue of ... · cross-docking, as part of the...

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